Italy wants citizens to help in its budget fight with Europe

The appetite of ordinary Italians to invest in their government's debt will be tested this week when Italy issues bonds with returns that are much higher than inflation. The rate of interest the government pays on its $2.6 trillion in debt has been driven higher by the reluctance of foreign investors to buy, given the fight with Europe.

Matteo Salvini, the country's deputy prime minister, says Italians who purchase government bonds should be rewarded with tax breaks.

"The fact is that we must help those who invest in Italian government bonds," Salvini said in October. "I would like the money saved by the Italians to help Italian companies, Italian pension funds and not go to foreign investment funds."

A wave of bond buying by Italian savers would help the government finance spending plans that have been rejected by the European Union because they violate its rules on public debt.

Europe could punish Rome

But it would expose those investors to huge risk if the fight escalates into a debt crisis.

The European Commission opened disciplinary proceedings against Italy on Wednesday, certifying that its 2019 draft budget does not comply with the bloc's fiscal rules. EU laws require members to reduce debt once it exceeds 60% of GDP, but Italy's plan to raise its budget deficit to 2.4% of GDP means its debt won't be falling fast enough.

Italy risks fines of up to 0.5% of GDP if it does not back down.

European Commission rejects Italian government's spending plans

The country's public debt already stands at 131%, and investors worry that a protracted fight between the country's populist government and EU officials could hike borrowing costs still further and trigger a crisis with the potential to spread across Europe.

"I ask Europe for more respect for the Italian people," Salvini wrote on Twitter on Wednesday after the European Commission confirmed Italy was in "particularly serious non-compliance" with its rules.

'If something is genuinely good, people will buy it'

Despite the risks, the government may find willing buyers for its debt for two reasons.

First, government bonds have traditionally been popular investments in the country. Italian banks, for example, own huge chunks of the country's debt.

"It's one country in the region where ownership of sovereign debt is very much domestic," said Simona Gambarini, a markets economist, at Capital Economics.

Italian banks are reeling. A budget fight with Europe won't help

The second reason is the relatively high wealth of Italian households, which totals an estimated €9 trillion ($10.3 trillion) and has often been touted as a potential buffer against economic disaster.

The average household in the country had net wealth of €206,000 ($235,000) in 2016, including real estate and financial assets, according to a survey conducted by the Italian central bank.

But do Italians really want to spend that money on government debt?

"If something is genuinely good, people will buy it," said Fabio Bartolo, a corporate communications consultant in Rome. "The problem is that historically, not even foreign countries bought Italian bonds."

Federica Pacini, a business compliance specialist who works in Milan, said she would consider buying government bonds, but "not because Salvini is asking."

"Politicians have not been very good in handling public debt and expenses in general," she said. "But as an investment, I would buy Italian bonds."

A risk for households

Investors risk getting caught in what economists call a "doom loop."

Italy has spent tens of billions of euros in recent years propping up the banks, which has in turn put more pressure on the government's finances.

Declining bond prices weaken the balance sheets of banks that hold government debt. Banks that get into trouble may then require bailouts that stretch government finances further.

A working paper published by the International Monetary Fund in August warns that households in the country have become increasingly exposed to the financial sector.

The risk is that some of those investors will be left holding the bag in a crisis.

Barbara Spera, a teacher, said that she has always preferred to keep her savings in a bank account.

"I've never invested in Italian government bonds," she said. "I don't like the government's economic policy, and so Salvini's comments don't make me more likely to buy bonds."

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